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IN RE BOARD OF DIRECTORS OF TELECOM ARGENTINA S.A.

November 18, 2005.

In re: BOARD OF DIRECTORS OF TELECOM ARGENTINA S.A. AS FOREIGN REPRESENTATIVE OF TELECOM ARGENTINA S.A., Debtor in Foreign Proceeding.


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

On October 17, 2005, The Argo Fund, Ltd. ("Argo"), a creditor of Telecom Argentina, S.A. ("Telecom"), filed a motion to withdraw the reference of the above captioned petition from the United States Bankruptcy Court for the Southern District of New York to the United States District Court for the Southern District of New York, pursuant to 28 U.S.C. § 157(d). For the following reasons, Argo's motion is denied.

  I. BACKGROUND

  Telecom is a sociedad anonima organized under Argentine law which provides telecommunications services in Argentina.*fn1 Telecom claims that due to Argentina's economic recession and currency devaluation in 2001, it faced a severe liquidity crisis and inability to service its debt.*fn2 Under Argentine law, an insolvent company can restructure its debt through a privately negotiated Acuerdo Preventivo Extrajudicial ("APE").*fn3 The APE must be approved by a supermajority in amount and majority in number of the holders of debt, and then confirmed by an Argentine court.*fn4 Once confirmed, all of the company's unsecured creditors are bound by the APE.*fn5

  Telecom negotiated an APE with its creditors and secured an Argentine court's approval.*fn6 The beneficial holders of Telecom's outstanding unsecured financial debt voted in favor of the APE by a supermajority of 94.4% in principal face amount and 82.4% in number.*fn7 However, U.S. Bank N.A., the indenture trustee for certain notes issued by Telecom, refused to cancel notes held by creditors who did not affirmatively consent to the cancellation.*fn8 Consequently, on September 12, 2005, Telecom's foreign representative, the Board of Directors of Telecom Argentina, S.A. ("Board"), filed a petition for relief under section 304 of the Bankruptcy Code*fn9 in the bankruptcy court seeking a judgment giving full force and effect to the APE in the United States.

  Argo claims to be the beneficial holder of interests in notes ("Notes") issued by Telecom in the United States under an indenture qualified under the Trust Indenture Act ("TIA").*fn10 Argo claims the APE would impair its rights under the Notes, in violation of the TIA. The TIA provides that "the right of any holder of any indenture security to receive payment of the principal and interest on such indenture security . . . shall not be impaired or affected without the consent of such holder."*fn11 Under the APE, Argo would receive either approximately eighty percent of the principal owed under the Notes, or new notes which extend the dates on which principal was due, without compensation for outstanding interest.*fn12 Argo did not agree to the APE or participate in the Argentine proceedings.*fn13 Argo also contends that Telecom had sufficient assets to cover its outstanding obligations and therefore the APE is "the equivalent of a bad faith bankruptcy filing."*fn14 Argo now moves to withdraw the reference of the case from the bankruptcy court to the district court pursuant to section 157(d) of Title 28 of the United States Code.

  II. LEGAL STANDARD

  A. Mandatory Withdrawal

  Section 157(d) mandates that the district court withdraw a proceeding referred to the bankruptcy court if "resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce." The Second Circuit construes this provision "narrowly," requiring withdrawal of the reference only if "substantial and material consideration of non-Bankruptcy Code federal [law] is necessary for the resolution of the proceeding."*fn15 Withdrawal of the reference is appropriate where the case would require "the bankruptcy court to engage itself in the intricacies" of non-Bankruptcy law, as opposed to "routine application" of that law.*fn16 The "bare contention" that non-bankruptcy law is dispositive or in conflict with the bankruptcy code is not sufficient.*fn17

  B. Discretionary Withdrawal

  Section 157(d) gives the district court discretion to withdraw the reference of a case referred to the bankruptcy court "in whole or in part . . . on timely motion of any party, for cause shown." Although the statute does not define "cause," the Second Circuit has held that "[a] district court considering whether to withdraw the reference should first evaluate whether the claim is core or non-core."*fn18 Section 157(b)(2) sets forth a nonexhaustive list of core proceedings. Congress intended that core jurisdiction be construed broadly to avoid overwhelming the district court with bankruptcy matters.*fn19 "[C]ore matters are ones with which the bankruptcy court has greater familiarity and expertise."*fn20 After the court determines whether a matter is core, the inquiry turns to "whether the claim or proceeding . . . is legal or equitable, and considerations of efficiency, prevention of forum shopping, and uniformity in the administration of bankruptcy law."*fn21

  II. DISCUSSION

  A. Mandatory Withdrawal

  Argo argues that withdrawal of the reference is mandatory because this case requires the bankruptcy court to determine Argo's rights under the TIA. But the TIA is not dispositive here. A recent section 304 proceeding involving an Argentine APE, In re Board of Directors of Multicanal S.A., addressed this very issue: whether the TIA bars the restructuring of a company's debt purusant to an APE over the objections of a minority noteholder.*fn22 In a well-reasoned decision, Bankruptcy Judge Allan L. Gropper held that "there is no real conflict" between the TIA and section 304.*fn23 A noteholder's rights under the TIA are not inviolate — rights under a TIA-qualified indenture can be impaired in a U.S. bankruptcy case.*fn24 If a foreign insolvency proceeding is entitled to comity under section 304, there is no principled basis for concluding that a noteholder's rights under the TIA should trump that proceeding.*fn25 Foreign debtors need not grant recalcitrant minority noteholders absolute rights under the TIA that those noteholders would not have in a bankruptcy case in the United States.*fn26 A person who contracts with a foreign entity is ...


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